If spending is NOT responsive to changes in the interest rate,then the
A)LM curve is vertical.
B)IS and LM curves are vertical.
C)IS curve is vertical.
D)IS curve is vertical and the LM curve is horizontal.

Question

Quizplus · Accepted Answer

The IS curve represents the relationship between the interest rate and the level of income that brings the goods market into equilibrium. If spending is not responsive to changes in the interest rate, it means that investment spending does not change with interest rates, leading to a vertical IS curve because changes in the interest rate do not affect the equilibrium level of income in the goods market. The LM curve, which represents the money market equilibrium, is not directly affected by this assumption and thus its shape is not determined by the responsiveness of spending to interest rates.

If Spending Is NOT Responsive to Changes in the Interest